There has been a long-standing demand from the real estate sector in India for the introduction of Real Estate Investment Trusts (REITs) and the Infrastructure Investment Trusts (InvIT). While they were first permitted a few years back, they did not take off due to ambiguity of tax treatment of pass through payments. Recently, the government has clarified on the status of pass-through payments in case of REITS and InvITs as also it has permitted mutual funds and banks to invest in these instruments; of course subject to certain pre-defined limits.
So, what exactly are REITS and InvITs?
A REIT is a kind of a real estate mutual fund. Just as a mutual collects money from unit-holders and then invests them in equities or debt instruments, a REIT will collect money from investors and invest the money in real estate projects. The REIT will then invest such moneys into fully completed and unfinished real estate projects. Whatever returns are generated on these real estate investments are then distributed to the REIT investors in the form of dividends. Most of the REITS are medium term gestation projects.
InvITs are a slight variation of the REIT in that InvITs only invest in infrastructure projects with long gestation periods. Thus a massive road project or highways project or even massive irrigation projects can attract InvITs to invest in them. It may be noted that IRB Infra has recently proposed to launch an InvIT and raise funds from the public for the same. Whatever returns that are generated by the infrastructure project in the form of toll charges will be distributed to the InvIT investors in the form of dividends.
Why REITs and InvITs can actually be game-changes for the realty sector..
Both REITs are similar in concept and differ in the end assets that they invest into. Both these products offer benefits to the project developer and to the investor in these products..
How will project developers benefit from REITS and InvITs?
Most real estate projects and infrastructure projects are plagued by illiquidity. This makes entry and exit into such projects difficult. REITS and InvITs offer a viable exit route for developers, who can monetize either part of the project or their entire project. Currently, the absence of exit routes is keeping many serious players from getting into this business in a big way. REITS will provide an answer to this problem.
A very important benefit for the project developer is that these REITs and InvITs provide them an opportunity to convert their asset heavy models into an asset-light model. Typically, infrastructure developers have expertise in operating the infrastructure not in keeping huge assets in their books. InvITs and REITs will enable these developers to actually reduce their balance sheet size and consequently improve their ROI.
In India, many real estate projects are stalled due to absence of last-mile funding. This leaves many property buyers also in the lurch. Most banks have become very strict on exposure to real estate and hence bank funding has become a lot more selective. Under these circumstances REITs can plug a major funding gap.
Lastly, it also gives developers and infrastructure project owners an additional source of funding. Most Indian PSU banks are sitting on a pile of bad infrastructure loans and fresh funding is not forthcoming. This is also a long term funding source and does not impose financial burden like bank funding. It helps the financial viability of projects.
How will investors benefit from REITS and InvITs?
For investors it offers a more scientific and reliable way to invest in real estate. They can participate in the growth of real estate assets without the hassles of buying actual real estate. For investors it is almost like holding real estate in demat form.
This product also becomes suitable to HNIs and retired persons who are looking at regular income. Typically, REITs are required to distribute most of their earnings to the investors and it can become a good source of safe and regular income like debt funds.
For retail investor portfolios, it offers a diversification of risk from regular asset classes like equity, debt and gold. Even within the real estate sector, it is possible for investors to lay their hands o a very high quality and diversified portfolio of real estate assets. This is something an individual cannot create by themselves.
For long term institutional investors like Insurance Companies and Pension Funds, this offers a good low-risk option. Infrastructure assets being long gestation assets, it also helps long term liabilities being better matched.
It is not just about developers and investors. It is also a big benefit from the macroeconomic point of view. It helps channel funds for the critical infrastructure projects without putting a strain on government finances. After all, infrastructure has a multiplier impact on GDP and industrial growth. That will be the icing on the cake!